Ask a Sellside Options Trader

Will Hunting:

What kind of options do you trade?

Flow vanilla single stocks

Cramer:

Great answer, thank you.

One more question though. It seems for IBD people always say you need a sophomore internship in finance, then an IBD internship junior year to be competitive for FT recruiting. Is it the same for S&T where you need trading internships or finance experience your sophomore and junior summers or are they more concerned about finding the smartest people/most interested in the markets and aren't as caught up with actual experience?

Yes in S&T there is less focused on this "path to greatness" than IBD, but at the same time if you get a stack of 100 CV#s and need to choose 10 to interview, you have no idea how similar all the CVs look. I know that in the mindset of a student aplying they think they are an individual, and that they are smart and have this amazing passion for the markets, but someone looking at this stack of CVs doesnt know you, all they know are the words on the CV they look at for 20 seconds. Therefore you might be smart and passionate but if you cant convey that on that one page it doesnt matter. Therefore I would say your experiences are vital. I was able to get through a lot of screening processes by having a private equity internship after my freshamn year. It was a tiny boutique, but it showed that i was interested in the field, that i was able to go out and get opportunities, and it was something that stood out a little bit.

So dont focus on any specific path you thinkyou need to follow, but just go out and find opportunities that you are interested in and your CV will become more interesting to read. For example a friend of mine did an internship at a sports betting company. Something like that stands out, and is quite interesting to a trader.

Slapshot101303:

So what are the differences between being an option trader at a BB vs one of the option market makers in Chicago (Wolverine, CTC, Optiver etc)

I have never worked for one of those firms so i can say how it is from my perspective. One of the largest differences is that BBs have clients and the MM's do not. BBs generally handle larger size due to the client side of things, where they have to take down a lot of risk and then manager. MMs are more concerned with trading on the screen and in the broker market, so as a BB trader I will often times trade vs MMs in the broker market. Really boils down to where you think your edge comes from. At a BB you can get into positions at a fairly good level from clients, at a MM you try to really find smaller inefficiencies and its a bit more like scalping from what i gather, but someone else who has worked here will have to chime in.

newbprosmonk:

1) I'm just curious, is it difficult market making single stocks near earnings releases or similar events? How do you go around that? 2) Practically speaking, what do you do on the desk? I'd imagine that computers would do a lot of the execution nowadays. Do you ever have to "manually" make markets, if that makes any sense.

What books/resources would you recommend for an intermediate options player that's practical (Never worked on any desk, just learned about vol. etc. etc. by doing and failing.)

1) Short answer yes. But with known events the vol sort of follows a predictable path, so vol squeezes into the announcement obviously, and then drops off after it comes off. But yes it is tricky because you cant give a ridiculously wide pricer (obv can be a bit wider) but lets say implied is 25 and realized is 18, do you buy that hoping the earnings move is big enough to offset the decay you pay on every non earnings day? or do you sell it and then potentially have a 10% move and you are short gamma?

2) Computers do not make any markets. Might be different in the US but in Europe on a BB desk market making is 100% manual, and i dont see that really changing. European screens for options have such small size and are sometimes so ridiculously tight because people put bids and offers in 5 lots, that any computer that auto prices will be getting picked off. For example a Dec13 second rate german name might be 20-20.4 vols wide on the screen in 5x5 lots, and you can easily see it in the broker market at 19 - 23 vol. Therefore you need humans to price.

3) In terms of books, the best book for a beginner is Intro to Options Trading by Frans de Weet. Hull is a bit pointless because it scratches the surface of a lot of topics, Natenberg is a bit better, but honestly the best exercise to learn how to trade options is to take some blank paper. Then for each of the following strategies: call, put, callspread, putspread, risky, strangle, butterfly, calendar spread, draw out what happens to your delta, gamma, theta, vega, rho,borrow risk, dividend risk as spot changes, as vol changes and as time to maturity changes.

qweretyq:

Why did you choose flow trading instead of prop shop?

Bit more of a straightforward process in terms of applying. I also dont think i could have passed the mental math tests Optiver has haha.

Also starting at a BB I think is a better move unless you are really confident you can make money at a prop shop. It exposes you to a lot more things, a lot more people, you get a much better sense of how the business works. You can network with people across the floor which is so important. You might after 6 months trealize you actually want to trade a different product etc. Also client trading really teaches you how to manage risk you dont want. When a client requests comes in you only have a couple minutes to price it, and it might be about something you dont really have an opinion of and havent analyzed. In a prop sense, you analyze trades and rteally build an argumnt for why you want to get into a position, its very proactive, whereas flow trading can be much more reactive, and you really learn how to dodge bullets that can blow you up, which is an ability that is useful if you would like to move to be a prop trader later.

inthe213:

did you have a quantitative/math background before coming in? what are the bonuses like at Analyst-VP levels?

Cant talk about pay. I didnt really have a quant background, just economics. The need for a quant background is very overstated, what you need is an ability to work with numbers. The onlytime I do actual math is when im loooking at new ideas, and they might be a bit more complex, and so there are times where my desk is covered in equations.

newbprosmonk:

1) I'm just curious, is it difficult market making single stocks near earnings releases or similar events? How do you go around that? 2) Practically speaking, what do you do on the desk? I'd imagine that computers would do a lot of the execution nowadays. Do you ever have to "manually" make markets, if that makes any sense.

What books/resources would you recommend for an intermediate options player that's practical (Never worked on any desk, just learned about vol. etc. etc. by doing and failing.)

Thanks for doing this.

Natenberg and Hull.

Revsly:

I'm not as familiar with equity markets (I trade FX Vol), and I'm wondering when you trade in brokers, do you exchange delta?

Also, is there any direct market? ie Call up GS to get a price in 1m 100s or something.

99% of the time you exchange delta. Every so often you see a market that is naked but you see that maybe once every couple of weeks.

There isnt an active direct market. There are times we do OTCs directly with other banks but its more an agreement we do at the end, so it started out as a broker trade but then sometimes one cpty says they need to do OTC etc, but in general very little is done OTC in equity options.

JWick:

Hi,

You mentioned that the need for a quantitative degree is overstated. Would you mind naming some of the more quantitative desks and whether a non-quantitative degree would still be suitable?

Thanks!

The more quant desks in equities are: flow single stock exotics, flow index exotics (these two teams are generally split up into trading and pricing teams, the pricing teams are def more quant oriented while the trading less so), then you get more complex from tehre so structured products (trading and structuring), hybrids and so on. I would say you can survive on the flow exotics desks without a quant background, anything more than that youdo start to need some formal mathetmatical training. And on the flow exotics desk, you still do need quant ability up to the point you can unerstand the product back to front.

nontarget kid:

Thanks for doing this Q&A, it's very helpful. Speaking with alumni, I've been advised to try to get on a vanilla options desk (whether it be credit, interest rates, equities, FX, etc.). The general advice has been that on an exotics desk, you only learn how to model and not really trade, whereas on a vanillas desk, you actually learn how to trade, which leads to better exit opportunities (hedge funds, prop shops, etc.). Is this true from your experience or are the skill sets you develop on vanilla and exotics desks essentially the same?

Also, when I visited trading floors, the traders seemed to specialize in one specific product. For example, on the fixed income exotics desk I visited, one guy only traded bermudans, one guy just traded inverse floaters, etc. On the vanilla options desk, one trader managed the gamma book and the other managed the vega book. I was wondering how a new trader is assigned to a specific product. I'm pretty sure you don't get to choose whether you want to trade the gamma or vega book. How is the assignment made, especially at the junior level?

1) Speaking in terms of equities, I think vanilla options book and the flow exotics book (these traders generally sit together or very close) is a great training ground in terms of actual trading. But I would say whenever you are managing risk you get a good trading education. If i had to advise which desk to join I would say the flow exotics book is the best place to start, because you can move from being a flow exotics trader to being a vanilla trader but it takes quite a bit of learnings to do the move the other way around. Because doing flow exotics teaches you about trading vanilla's.

2) I have never heard about splitting up a book by greek, except for FX desks where i have heard of a seperate rho book. In equities on the sector desk its split up by industry, you will have a TMT trader, financials etc. On the index desk generally all the guys cover all the indices as one team. Im guessing on some FICC options desks you can have much longer maturities, which leads to being able to split it up by maturity, and the rho risk is abit more prevalent etc etc.

nontarget kid:

Thanks for the advice. What I meant by the gamma book and the vega book was the short-term book and the long-term book, respectively. At least that's what I was told when I visited. W.r.t. the industry you end up trading in equities, how is the assignment made when you are hired full time on the desk?

As Revsly said, any trading assignment within a team is done by business need. There is no set time frame when u get a book or start to trade. Its a combination of someone leaving or some restructuring and the managers feeling they can trust you enough. In general you will first be assisting a senior trader, so you will be helping out on whatever he covers, and then someone might leave and if you have shown you can do a good jbo they will let you cover what the person leaving did.

AuranB9:

What are the exit ops for single stock options flow trading?

anything you want as long as you work at it hehe

but honestly just like any desk its a limited skillset, but with a little bit more effort you can go into trading other derivatives. It gives ytou a good grounding in terms of company analysis as well as more quantitative analysis. FOrces you to learn about corporate actions, fundamentals of companies but also about how to manage a book of risk.

vlition:

when are single stock vol swaps going to be liquid again , let's bring back bespoke dispersion

I dont see this in the near future. Single stock options arent liquid period at the moment in Europe. And most players do not really want to touch single stock vol swaps after the experiences of 08. The problem with single name vol/var swaps is the constant vega exposure as spot goes down. For example lets say a company gets near bankruptcy and drops from 100 to like 5, it is not uncommon for situations like these for these names to jump around in 100% increments because the stock price is so low. Now if you had sold regular options when the stock was at 100 you would be hurt on the move down, but at least that would be it and you would drop away from your vega exposure as you move away from the strike. But if you had sold a var/vol swap you would be killed on these huge moves when the stock is so low.

beakerbeaker:

Mind addressing this one?

Which IDBs do you trade with? I've been looking to make the jump and an weighing the pros and cons of leaving ER for something where comp is more tied to performance than anything. Any insight on the interdealer world from your seat as the client?

Generally with IDBs have a couple that talk to regularly, whcih is composed of hte main ones (ie Exane, Icap, GFI, Cantor, Tullets etc), but see all broker flow so if some small broker has a quote im interested in talk to them then.

If you want to go into broking make sure you go to one of the major players, there have been TONS of small shops started but they are currently struggling.